A manufacturer is in need of a large transformer. This transformer is to be built made-to-order, since it is a special purpose one. The manufacturer asks for a bid from the BBA Company – a manufacturer of large transformers. You are a consultant working for the BBA Company. Information on the project network and activity costs is given in the following table. Use AOA representation for the project network.
The cost for an activity is incurred once the activity is finished. The mark-up is agreed to be 10%. The retainage is 8%. The discount rate is taken to be 0.25% per week. The client has agreed to pay the (cost + markup) for the project in 3 payments. The first payment is paid in advance at t ¼ 0 and consists of 15% of the total (cost + markup) of the project. An offer is expected from the BBA Company concerning the timing of the second payment, which both parties agree should coincide with the realization of an event on the project network. The (cost + markup) of all activities completed up to that point in time is to be paid by the client to the BBA Company in line with the contract. The third payment is made at the completion of the project covering the remaining (cost + markup). (a) The BBA Company asks you to provide it with the starting times of the activities as well as nodes the timing of the second payment, which will maximize its NPV. (b) Draw the cash flow diagram over time for your solution.
